CBN expands MFB powers to issue CPs and boost capital standards

When Central Bank of Nigeria, Abuja announced on March 6, 2020, it widened the permissible activities of Microfinance Banks (MFBs) to include the issuance of domestic commercial papers (CPs) and the appointment of agents under the agency‑banking model. The move, documented in the Revised Supervisory and Regulatory Guidelines released in January 2020, was framed as a response to rising competition for deposits and loans, plus a creeping credit‑risk problem that was hurting smaller lenders.

Background to the micro‑finance sector in Nigeria

The micro‑finance landscape has long been a cornerstone of financial inclusion, serving roughly 8.9 million active customers across the country. Yet a 2019 sector review highlighted that many MFBs were under‑capitalised and struggled to compete with larger commercial banks. The Central Bank’s own Nigeria‑wide financial sector report warned that without a structural overhaul, the sub‑sector risked a wave of defaults.

Details of the Revised Guidelines

Under the new rules, MFBs can now issue domestic CPs “subject to CBN approval,” a clear shift from the earlier prohibition on any commercial‑paper activity. At the same time, the guidelines keep a hard line on international CPs, foreign‑currency borrowing and cross‑border electronic funds transfers.

Beyond CPs, the regulators opened the door for MFBs to invest in money‑market instruments such as Nigerian Treasury Bills and to tap the CBN Intervention Fund. The list of permissible activities grew to cover micro‑leasing, hire‑purchase, financing of agricultural inputs, and even advisory services for low‑income entrepreneurs.

On the flip side, the rules tighten the ban on speculative land deals, real‑estate activities beyond office accommodation, and any collection of third‑party cheques. In short, the regulator tried to steer MFBs toward core‑lending and away from high‑risk ancillary businesses.

Capital requirements and the pandemic extension

Perhaps the most eye‑catching change is the re‑classification of MFB licences from three tiers to four, each with its own minimum capital ceiling:

• Tier 1 Unit MFBs: NGN 100 million by April 2020, rising to NGN 200 million by April 2021.
• Tier 2 Unit MFBs: NGN 35 million by April 2020, rising to NGN 50 million by April 2021.
• State MFBs: NGN 1 billion (no change).
• National MFBs: NGN 5 billion (no change).

The global COVID‑19 shock threw a wrench in the works. In its 2020 Annual Economic Report, the CBN noted that many institutions could not meet the original April 2021 deadline, prompting an extension to April 2022. By December 31, 2020, only 259 of the 912 registered MFBs had satisfied the new capital floors, while 499 remained at or below 50 % of the required amount.

Compliance figures slowly improved after the extension, but the gap underscores how fragile the sector remains.

Market impact and industry responses

Early reactions were mixed. Smaller MFBs warned that the higher capital bar could force costly mergers or push them out of business. Larger players, however, welcomed the consolidation push, arguing that a more robust balance‑sheet would improve borrower confidence and lower default rates.

In a statement, the CBN highlighted that the capital hike would “encourage consolidation, which should strengthen the industry.” Meanwhile, the National Association of Microfinance Unified Information Technology (NAMBUIT) rolled out an upgraded core‑banking platform to help MFBs meet reporting standards and integrate the new BVN (Bank Verification Number) enrolment module. By the end of 2020, 513 out of 912 MFBs had submitted BVN data, covering about 1.9 million customers – roughly one‑fifth of the sector’s client base.

Analysts note that the ability to issue CPs could open a new, lower‑cost funding line for well‑capitalised MFBs, allowing them to diversify away from deposit‑driven financing. The downside? Smaller institutions may lack the scale to access the commercial‑paper market, potentially widening the gap the reforms aim to narrow.

Looking ahead: consolidation and technology

Going forward, the regulator’s strategy hinges on two pillars: encouraging mergers that produce financially sound entities, and leveraging technology to streamline compliance. The NAMBUIT platform, coupled with the CBN’s digital‑intervention fund, is expected to lower operational costs and improve risk‑management capabilities.

Experts from the Institute of Banking and Payment Services predict that by 2024, the number of active MFBs could shrink by 20 % as weaker players exit or merge, while the total loan‑portfolio size might grow by double‑digits thanks to better‑funded banks tapping CP markets.

For borrowers, the biggest question remains whether the reforms will translate into more affordable credit. If larger, better‑capitalised MFBs can offer lower rates, the benefits could ripple through the informal economy, stimulating small‑business growth and job creation.